Check How America Embarked On Economic Growth And Job Creation Through The Consumer Credit System

Dr Matthew Opoku Prempeh

 

In 1946, following the end of World War ll, the United States of America was confronted with an unexpected Economic Crisis (inflation for the first time increased to a double digit, unemployment, high cost of living etc). At the time, American exports wasn’t enough for economic growth. The American Council of Economic Advisors delivered solutions for the ailing American economy to President Truman.

The game changer

To curtail the apparent economic crisis, the government based on advise from the American Council of Economic Advisors, advanced two major economic reforms. What did the government do? It reduced interest rates and most importantly, implemented a consumer credit system. Store credit, installment credit, personal loans, pay day loans etc were implemented. Low interest rates and the credit system made borrowing to buy homes, cars, gadgets, appliances, electronics etc really cheap. Consumption and promoting of spending became an explicit economic strategy in the years after the World War ll.

The ripple effects

As Morgan Housel, a finance expert and two-time winner of the Best in Business Award from the Society of American Business Editors and Writers puts it, it was hard to overstate how big the surge in demand and production was at the time due to the introduction of the consumer credit.

Truly, the war brought with it economic depression characterized by a halt in production of consumer products. The automobile industry for instance virtually collapsed. However, following reduction in interest rates and a consumer credit scheme, 21 million cars were sold from 1945 to 1949. Another 37 million were sold by 1955. These economic policies also resulted in a real estate boom from barely 2 million homes in 1945 to 15 million homes built by 1955.

Any amateur economist could foresee the outcome of these economic developments or the interactions between these two market forces. The increased demand for stuff, production and innovation created more jobs. The jobs, low interest rates and consumer credit led to an explosion of Americans spending capacity.

The Federal Reserve wrote to President Truman in 1951 that “By 1950, total consumer expenditures, together with residential construction, amounted to about 203 billion dollars about 40 percent above the 1944 level”

Tit bits
* The country got rich by making the poor less poor,
* ?The demand and supply boom translated into an increase in Jobs,
* ?Average wages doubled,
* ?Those gains focused on those left behind over the years. The gap between rich and poor narrowed by an extraordinary amount,
* ?The enormous lead of the well-to-do in the economic race reduced considerably,
* ?The equality went beyond wages. Minority and Vulnerable groups gained as well,
* ?The leveling out of classes meant a leveling out of lifestyles, the average people drove Chevys whilst the rich drove Cadillacs,
* ?Debt rose tremendously, but so did incomes, as such the impact wasn’t much a deal.

Conclusion

It is common knowledge that supply and demand are the major stimulants of a vibrant and thriving economy. These factors are in part also greatly influenced by consumer purchasing power or ability.

The critical role that a credit system plays would be to increase consumer spending ability. This simply means that a credit score ensures that spending ability is not only limited to those who hold cash (cash and carry) but broadened to include a larger segment of the population though loan/credit scheme. Affordability would does be based on consumer’s credit score/rating.

An increase in demand due to increased spending ability (credit facilitie) translates into increased production, and ultimately a vibrant and productive economy, which could set itself to run 24hours.

Lastly, according to the Kenya Institute of Economics preoccupation with “creating a 24-hour economy” reveals a mistaken understanding of what an economy is. Every economy is an aggregation of production and consumption and this takes place regardless of the arbitrary assignment of time intervals. Essentially therefore, every economy is a 24-hour economy because it aggregates all the consumption and production irrespective of the time.”

The writer concludes that the chanting of 24 Hour Economy remains as just a vague political slogan. However, the writer understands that this piece may not be exhaustive enough on the subject matter. But this also seeks to stimulate further discussion.

Source: Napo _Inspires Research Team.

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